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Was the market right to be wary about AGL’s bid for Vocus?

Paul Rickard
Thursday, June 13, 2019

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AGL’s $3 billion bid for struggling telco Vocus smacks of desperation and the market was right to give it the “thumbs down”. AGL shares closed yesterday at $19.55, down 6.5% since the non-binding indicative proposal was announced.

Pitched at a price of $4.85 per share, AGL has been granted exclusive access by the Vocus Board to conduct due diligence for the next 4 weeks. AGL is the third suitor to review Vocus, the last, Swedish group EQT Infrastructure, walked away less than a week into its due diligence processes. It had indicated a price of $5.25.

The good news is that the market also thinks that AGL will see “reason” and the bid will  wither on the vine. Vocus shares were yesterday changing hands at $4.30, a massive 55c  below the bid price.

So why did AGL bid for Vocus?

AGL is desperate to find new revenue sources as it faces declining wholesale energy prices from generation, and in the medium term, reducing volumes as coal fired power stations are phased out. Part of this is its own fault – the way it mishandled the announcement of the planned closure of the Liddell Power Station means that it has no friends in Canberra, no friends at the ACCC, no friends in the media and no friends in the public. The “big stick” legislation the Coalition government is introducing is about getting square with AGL.

Strategically, AGL had been pinning its hopes on the development of a services business involved in the smart distribution, monitoring and measurement of energy, particularly green energy. Applications include smart meters, optimised roof-top solar, electric charging stations for motor vehicles and the “internet of things”.

But this new business, like many organic businesses, is a slow burn and is developing off a very low base. The market knows that power prices are going to fall and AGL’s profit will be hit.

Acquisition is the next strategic option. The “big stick” legislation means that AGL will be precluded from bidding for a competitor, so it has decided to consider an adjacency – the telecommunications industry.

With customers increasingly connected, there is a convergence of sorts between the energy and data value streams as the traditional energy sector transforms. Further, the capabilities in integrating and managing complex assets and customer portfolios are similar in both industries.

That’s the high level strategic rationale for AGL’s interest in telecommunications. More specifically with Vocus, AGL says:

·       Revenue and operating cost benefits from the integration of the customer platforms and development of a multi-product offering across energy and data;

·       Accelerating “untapped” growth from the integration of Vocus’ high quality broadband fibre infrastructure network with AGL;

·       Improving the offer to AGL’s wholesale and enterprise customers by the provision of an integrated data and energy service; and

·       Vocus’ data centres adding benefit to AGL’s wholesale electricity generation portfolio.

I get that this means that AGL thinks it can sell a “bundled” package of electricity, gas, broadband, mobile and other services to Vocus’ Commander, Dodo and iPrimus customers, and vice-versa to AGL’s existing retail customers, but I don’t really get how this applies in the enterprise or corporate space. Nor can I see where the benefits lie in relation to Vocus’ New Zealand business.

Vocus is a $2bn revenue business, with $900m from its consumer and business division, $300m from its New Zealand operation, and $750m from Vocus Networks which services enterprise, government and wholesale clients. This is by far and away the most profitable division, and includes Australia’s second largest national inter-capital fibre network, the Australia Singapore undersea cable, and the north west cable system connecting the mainland with oil and gas facilities in the Timor Sea.

How these fibre assets and relationships with Government and enterprise clients fit into AGL’s business – that is, deliver additional operating benefits or revenue synergies – remains to be seen and prima facie, AGL’s rationale looks thin at best. Further, it is an acquisition, and the history of acquisitions achieving their financial objectives, particularly those away from an area of core competency, is poor. The reality is that in Australia, more acquisitions fail than succeed.

The market is right to be wary about AGL’s bid for Vocus. It is struggling to understand the impact of any convergence between data and energy and how the acquisition of Vocus will enhance the AGL customer proposition such that the acquisition premium can be recouped. Calling it an act of desperation might be a little tough, but on paper at least, it is not even getting past first base.

Published: Thursday, June 13, 2019


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